Most directors pay themselves a modest salary and take the rest as dividends. Salary is taxed under PAYE with National Insurance, while dividends come from after-tax profit with no National Insurance. For 2026/27 the dividend allowance is £500, and dividend tax rates are 10.75%, 35.75% and 39.35%.
Free tool: Try our free limited company vs sole trader calculator for 2026/27, with your own figures.
Why the mix matters
Salary is a deductible cost for Corporation Tax but carries employer National Insurance of 15% above £5,000 and employee National Insurance of 8% above £12,570. Dividends are not deductible, but there is no National Insurance on them. Dividends can only be paid from profits that remain after Corporation Tax.
Worked example, 2026/27
A company makes £60,000 before paying its only director. It pays 19% Corporation Tax.
Option A: £12,570 salary, dividends for the rest. Employer NIC is £1,136. Profit after that is £46,295, so Corporation Tax at 19% is £8,796. The director takes £37,000 of dividends. Dividend tax is £3,924 (after the £500 allowance, at 10.75%). The director keeps £45,646. About £500 stays in the company. Total tax: £13,855.
Option B: everything as salary. A salary of £52,826 leaves the company after £7,174 of employer NIC. The director pays £8,562 income tax and £3,067 National Insurance, and keeps £41,197. Total tax: £18,803.
The dividend route puts about £4,450 more in the director's pocket in this case.
Real cases differ: other income, pension contributions and profit levels all move the answer.
Choosing the salary
A salary at or around the personal allowance uses the allowance and, if it is above the lower earnings limit, protects the State Pension record. Whether to pay it up to £12,570 or lower depends on employer NIC against Corporation Tax relief. A single-director company with no other employees cannot claim Employment Allowance.
What to do
- Set the salary before the tax year starts and run it through payroll.
- Only declare dividends when there are enough retained profits, and keep minutes and vouchers.
- Review the split every year, because rates and thresholds move.
- Consider employer pension contributions before you extract more.
Common mistakes
- Paying dividends that the company has not earned. They are unlawful and may have to be repaid.
- No dividend paperwork.
- Drifting into the higher rate band without planning.
Sources: GOV.UK: tax on dividends · GOV.UK: employer rates and thresholds 2026 to 2027 · GOV.UK: Corporation Tax rates
Frequently asked questions
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